Mortgage Loan Programs
Residential mortgage loans fall into three basic categories: conventional, non-conforming, and government. Within each of these categories are specific mortgage loan programs that match the needs and circumstances of qualified borrowers, as outlined below:
- Government: Government loans provide financing for borrowers who meet specific housing requirements, income limits and other requirements.
- Conventional: Conventional, fixed rate loans feature one set interest rate over the life of the loan.
- Non-Conforming: Non-conforming loans don’t meet loan limits and other qualifications required by Fannie Mae and Freddie Mac.
The Federal Housing Administration (FHA), the Department of Veteran Affairs (VA) and the U.S. Department of Agriculture (USDA) provide loan programs for qualified borrowers.
With more flexible underwriting guidelines than conventional financing, FHA loans provide financing to home buyers who put down as little as 3.5%.
NOTE: FHA, which is a part of the U.S. Department of Housing and Urban Development (HUD), does not make, buy or sell loans; it insures them.
Advantages of an FHA loan
- Allows for financing with as low as 3.5% down, including multi-family homes (up to 4 units)
- Allows non-occupant co-signers for single-family homes
- 100% gift funds are available
- Higher income-to-debt ratios and lower credit scores are accepted
- FHA insurance is more expensive
- Condos must be FHA-approved or must go through an arduous approval process
- Properties that have health and safety issues (i.e., broken windows, peeling paint, missing railings, etc.) do not qualify
- You can only finance one FHA property, which must be a primary residence; exceptions are made only under very specific circumstances
- A mortgage insurance premium (MIP) and monthly insurance are required
Types of FHA Loans
There are two types of FHA loans:
- FHA 203(k) – FHA 203(k) allows buyers to roll renovation costs into their loan.
- FHA 203(b)
Advantages of FHA 203(k)
As long as the property appraisal for the home is supported, buyers can finance all the property’s needed repairs with as little as 3.5% down, covering the cost of the property AND the improvements.
Buyers can purchase a property that’s not financeable through FHA, including properties with:
- septic issues
- broker windows
- peeled paint
- stripped copper, etc.
USDA loans are NOT farm loans! In fact, farms don’t even quality. Homes that qualify for USDA loans are determined by community population, density and income level. Many homes qualify, but geographic restrictions do apply.
NOTE: USDA does occasionally change their listings of approved properties, so it’s important to make sure a property still qualifies.
Advantages of USDA
- 100% financing with no monthly mortgage premium
- USDA is similar to FHA in terms of qualifying, but is less expensive and maintains less restrictive property considerations
- Household income limits are non-negotiable
- Approvals depend upon geographic location and family size
VA home loans allow U.S. veterans to buy a home at a low interest rate with no money down. All eligible veterans must provide a VA certificate of eligibility from the government. Eligible candidates include:
- Veterans of the U.S. government who have completed a minimum of 6 years of active military service
- Anyone currently on active duty
- Spouses of veterans, including widows/widowers of veterans
Advantages of VA loans
- No money down
- No monthly mortgage insurance
- Qualifying credit flexibility
Conventional or “conforming” loans meet loan limits and other qualifications required by Fannie Mae and Freddie Mac, including:
- loan amounts of up to $417,000 for a single-family home
- somewhere generally between 5 % and 20% down
- strong credit scores, with a minimum score of 620
NOTE: Conventional loans are not insured or guaranteed by government agencies, such as the Federal Housing Administration (FHA), the Department of Veteran Affairs (VA) or the U.S. Department of Agriculture (USDA).
Adjustable Rate Mortgages (ARMs)
ARMs begin at a lower interest rate for a set time-period, then adjust to current market rates. ARM types include:
- Hybrid – These types of ARM loans offer fixed-rate loans for the first 3, 5, 7 or 10 years, then adjust annually thereafter.
- Option – Option loans offer a wide variety of payment options, which your loan officer can discuss with you.
When to Choose an ARM loan
ARMs can be a smart choice for borrowers who plan to:
- Move in the next 5 to 10 years
- Start a professional career with significant income increases pending (i.e., a lawyer taking the bar exam; a doctor finishing his/her residence, etc.)
- Pay off student loans or other debt within the next 5 years
- Purchase a property as an investment intending to be flipped
Blended mortgages, which combine fixed-rate and ARM loans, are known as Jumbo Busters or 80/10/10 loans.